CHALLENGES THE ENERGY SECTOR IS FACING AND HOW CRYPTO PROJECTS ARE AIMING TO SOLVE THEM

CHRISTIAN OTT

AUTHOR

Energy and Crypto?

2017 was a catalyst year for energy focused cryptocurrency projects. Several different companies presented their business ideas with which they aim to disrupt the energy sector. Most of them used an ICO as a method for gathering funds to realize their idea. During the crypto bear market of 2018 however, public interest in these projects has cooled down. In this article, I want to discuss why innovations in the energy sector are required and how cryptocurrencies can support these changes.

Why do we need change in the energy market?

Talking about the global energy providing sector as a whole is difficult, because its local submarkets highly depend on regulations in individual countries. Nonetheless, there are similar circumstances and trends affecting the whole market, such as rising demand, rising costs, centralization vs. privatization, need for sustainability, increasing pollution and catastrophe prevention. Let’s take a look at the global challenges in detail:

Challenge 1: Rising demand

Probably the biggest trend in the energy sector is rising demand. The global demand for energy is expected to grow by more than 25% to 2040.1 There is a variety of driving forces behind this surge in demand. On one side, we have a rising demand in electricity.2 It originates from the continuously growing digital economy3 or the expected growth in the electric vehicle sector, where the number of electric vehicles is said to rise from 4 million today to 1 billion by 2040.4 On the other side, there is rising demand from developing economies such as India, who will account for a much larger percentage of global energy consumption in 2040, than they did in the year 2000. A growing world population of about 1.7 billion people till 2040 will even further enhance the global demand for energy.5

Challenge 2: Rising prices

However, this rise in demand didn’t necessarily go along with reasonable costs, although it is difficult to compare data on energy costs across different countries. While the crude oil price is at half the price it was five years ago, it is still twice as high as it was 50 years ago (prices are inflation-adjusted).6 In the U.S., inflation-adjusted prices for electricity have increased by 7.5% since the year 2000, although they have stayed roughly around the same mark for the last 60 years (with a few ticks upwards and downwards).7,8 In Australia however, prices for households increased on average by 72% for electricity and 54% for gas from 2003 to 2013.9 Additionally, the electricity bill for households in Greece increased by 64% from 2010 to 2017.10 In Europe generally, the poorest ten percent of households spent 9.8% of their expenditure in 2015 on energy.11

On the contrary to Europe, the U.S. and Australia, inflation-adjusted prices for electricity have gone down by more than 55% over the last 20 years in China.12 In general, the electricity prices per KWH are way lower in China and in India (ranging around 0.08 USD) compared to the U.S. (0.13 USD), France (0.19 USD), Japan (0.22 USD) or Germany (0.33 USD).13 Concluding from that, energy prices are not rising in every country, but there are still more than enough countries who could use innovative approaches to reduce their local energy costs.

Challenge 3: Sustainability

As low as costs for energy in China may be, pollution is a major problem in the country. It causes 1.1 million premature deaths and losses of 20 million tons in crop production on average per year in China.14 A major part of that pollution derives from power plants with China being the world’s largest consumer of energy originating in coal and lignite.15 In general, cheap energy sources are not only one of the major causes of pollution in China, they also produce CO2 emissions, that are considered one of the causes of global climate change.16

But it is not only prevention of environmental pollution. The demand for energy since the Industrial Revolution has led to a wide-scale extraction of fossil fuels.17 Oil and gas reserves are expected to last until 2042 and coal is expected to be available until 2112.18 However, demand for energy will continue to rise, so there need to be new ways to produce energy, paving the way for mass adoption of renewable energy devices.

Additionally, the environmental catastrophes caused by the nuclear disasters of Chernobyl in 1986 and Fukushima in 2011 underline the need for sustainable energy generating solutions. While nearly 600 deaths are associated with the malfunction of the nuclear power plant in Fukushima,19 the Chernobyl disaster is estimated to have caused up to 200,000 deaths.20 The financial damage caused by the Chernobyl incident is estimated at around 235 billion USD,21 whereas the Fukushima incident caused 188 billion USD in costs.22 Both nuclear disasters also led to massive relocations of hundreds of thousands of people.23

CHALLENGESENERGY SECTORUNSUSTAINABLEENERGYGROWINGDEMANDRISINGCOSTS

The regulatory framework is under development

Unfortunately, the current structure of the market doesn’t help to solve these challenges. The energy providing sector is still dominated by centralized energy production, partly through state owned enterprises.24 This centralization is inefficient, since it reduces competition and tends towards monopolistic practices.25 However, due to these known inefficiencies and facing the above-mentioned challenges, several countries started to privatize their energy market or have already completed the privatization. In Europe for example, the energy market is mostly liberalized,26 while this liberalization is still in an ongoing process in Asia.27-29

Crypto companies disrupting energy markets

Different cryptocurrency companies are now seeking to turn these circumstances into an advantage for them. While the ambitions of these projects partly differ from each other, they share the same goal, which is to decentralize the energy market. Their core idea is to replace a small number of giant power plants with a huge number of small energy providers. This decentralized nature of their plans is an opportunity to solve the biggest challenges the energy market is facing and offers even more possibilities to make the market more efficient:

Opportunity 1: Matching consumers and producers

First of all, these platforms will give both providers and consumers the possibility to trade energy with each other without the need of middlemen. Small-scale producers who want to sell surplus power can use the platform to offer their energy production to others, while households can choose from a bunch of different producers in these platforms, that best fit their needs regarding clean energy, costs and location.

Opportunity 2: Reduced costs

This much increased competition in contrast to centralized energy providing systems will give consumers the ability to choose those energy providers in the market, that charge the lowest amounts for energy. In case all energy providers in the market charge unreasonably high costs for energy, the entry barriers for new energy producers that want to offer their services for cheaper prices than their competition, will be much lower due to the matching engine.

Opportunity 3: Payments on demand

Various companies in the crypto energy space are accompanying their energy trading platform with smart meters, that can be used by consumers and providers to measure energy consumption in real-time. These smart meters also give consumers the possibility to pay for their energy consumption on demand and in real-time. This opportunity is further facilitated by the low transaction costs of cryptocurrencies and the ability to automate the payment process with smart contracts.

Opportunity 4: Increased sustainability

The decentralized energy market introduced by these projects also increases sustainability in energy production. The targeted huge number of small energy producers will raise the percentage of renewable energy on overall energy produced, since smaller providers are much more likely to place a bunch of solar cells on their roof than to build an atomic power plant in their front yard. The ever-decreasing costs for solar modules, which have been reduced by 99% since 1980 and are projected to drop another 40 percent in the next five years,30 are further facilitating this change.

Opportunity 5: Energy as a commodity

Additionally, these platforms offer a new possibility of investing. If one of them creates a cryptocurrency, that is pegged to the price of energy (for example one unit of the coin equals the average costs of one kilowatt-hour across the market), they would basically create a new stable coin, whose value is determined by the current price of energy. It would create a new way of value-keeping, since most other stable coins are pegged to the price of fiat or precious metals.

While all these ideas are promising and needed in the energy market, it remains to be seen, whether the current cryptocurrency energy-focused companies can deliver on their promises. Most of these projects are startups that entered the market around two years ago and were financed via an initial coin offering. After a long crypto winter, these projects might be already running low on the funds gathered in their ICO and they might still be far away from being profitable enough to finance their company with their earnings alone. So, they could go out of business quickly and therefore not deliver on their promises.

Additionally, even if they are not running low on funds and can keep operations live for the next years, they could still not be capable enough to fulfill their promises. Developing a functional peer-to-peer energy trading application is a complex task, as well as equipping consumers with the necessary hardware such as smart meters or renewable energy devices and integrating these devices into a smart grid. It requires deep technological knowledge and understanding, which is also looked for in much bigger companies, that might offer a significantly higher wage and a significantly better work environment than these startups.

However, even if they have the funds and the talent, the progress of these projects can still be very slow. Besides the software and hardware development, which is already complex enough, these plans also include a huge amount of business development and regulatory talks. It is very well possible, that the first few years of these projects are spent on development, followed by several prototypes, while the promised peer-to-peer energy trading for the masses will be available several years later. And even if the product is great, it is not guaranteed that they can successfully onboard enough energy providers or consumers to make the platform interesting for the general public.

Wrap-up

This article outlined the challenges the energy market is facing and how cryptocurrency companies can support solving these challenges. Currently, the energy market is suffering from an ever-growing demand across the globe, while the costs for energy consumption are not necessarily staying at a reasonable level. To fight environmental pollution and to prevent catastrophes like the ones caused by malfunctions in nuclear power stations in the past, there is a strong need for sustainable energy production via renewable energy devices. Liberalization of the energy markets is completed in some parts of the world, while it is still in an ongoing process in other parts of the world.

Several cryptocurrency companies are now entering these privatized markets to decentralize energy production by providing users with the possibility to trade energy peer-to-peer. This will increase competition in the energy providing sector and will likely make energy consumption more cost-efficient. With the use of smart meters and smart contracts, users are able to pay for their energy consumption in real-time and on demand. The decentralized nature of this new energy providing market will likely raise the percentage of renewable energy on overall energy produced, since smaller-scale energy producers will rely on renewable energy. The platforms could also provide a new form of a stable coin, if they should choose to peg the price of their coin to the costs of energy.

While these plans are all great, it remains to be seen whether the current energy-focused companies in the cryptocurrency space can deliver on their promises. Executing these plans requires funding, talent and tons of effort, which a lot of startups fail to deliver. However, it will certainly be greatly appreciated if they did deliver and bring innovation to the energy sector, because change towards less centralization and more sustainability in energy production is highly needed.

Articles, that may interest you:

Sources – Innovations are needed

1

“In all cases, governments will have a critical influence in the direction of the future energy system. Under current and planned policies, modeled in the New Policies Scenario, energy demand is set to grow by more than 25% to 2040, requiring more than $2 trillion a year of investment in new energy supply.”

“Electricity markets are also undergoing a unique transformation with higher demand brought by the digital economy, electric vehicles and other technological change. As part of its deep-dive into the electricity sector this year, WEO 2018 also examines what impact of higher electrification in transportation, buildings and industry.”

“From 2006 to 2016, BEA estimates that digital economy real value added grew at an average annual rate of 5.6 percent, outpacing the average annual rate of growth for the overall economy of 1.5 percent.”

Bureau of Economic Analysis – U.S. Department of Commerce; Official Website; Defining and Measuring the Digital Economy; March 2018

4

“It means almost 1 billion electric cars on the road by 2040, compared to 4 million today.”

“In the New Policies Scenario, rising incomes and an extra 1.7 billion people, mostly added to urban areas in developing economies, push up global energy demand by more than a quarter to 2040. The increase would be around twice as large if it were not for continued improvements in energy efficiency, a powerful policy tool to address energy security and sustainability concerns. All the growth comes from developing economies, led by India. As recently as 2000, Europe and North America accounted for more than 40% of global energy demand and developing economies in Asia for around 20%. By 2040, this situation is completely reversed.”

“Electricity and gas prices for manufacturing businesses and households have increased sharply in recent years and indications are that prices will continue to increase. The underlying cause of these increases is different for electricity and gas and the contribution of each factor is also different for each state and territory. … In real terms—that is, taking into account the general increase in prices across all goods and services—prices for households increased on average by 72% for electricity and 54% for gas in the 10 years to June 2013.”

“Did you know that the electricity bill for households in Greece increased more (+64 %) over the last seven years (2010-2017) than in any other EU country?”

Eurostat; Official Website; Energy prices in the EU, 2017; 27.11.2017

11

“Europe’s households spend a varying amount of their income on energy, depending on Member State’s overall household expenditure. In 2015, 9.8% of the expenditure of poorest ten percent of households was spent on energy, excluding transport. Middle income households spent 6% of their expenditure on energy, and higher income households less still.”

European Commission; Official Website; Energy prices and costs in Europe 2018; 9.1.2019

12

The inflation-adjusted average wholesale price of electricity in China has decreased by more than 55% in the year 2014 compared to the mid-90s.

Statista; Official Website; Electricity prices worldwide by country 2018; 2019

14

“The two pollutants were found to cause an average 1.1 million premature deaths in the country annually, about 1,000 in Hong Kong. Around 20 million tons of rice, wheat, maize and soybean are also lost to exposure to ozone each year.”

South China Morning Post; Official Website; Air pollution is killing 1 million people and costing Chinese economy 267 billion yuan a year, research from CUHK shows; 02.10.2018

“Fossil fuels, as the name suggests, are very old. North Sea oil deposits are around 150 million years old, whilst much of Britain’s coal began to form over 300 million years ago. Although humans probably used fossil fuels in ancient times, as far back as the Iron Age, it was the Industrial Revolution that led to their wide-scale extraction. And in the very short period of time since then – just over 200 years – we’ve consumed an incredible amount of them, leaving fossil fuels all but gone and the climate seriously impacted. Fossil fuels are an incredibly dense form of energy, and they took millions of years to become so. And when they’re gone, they’re gone pretty much forever.”

Ecotricity; Official Website; The end of fossil fuels; 19.01.2019

18

“Crude oil, coal and gas are the main resources for world energy supply. The size of fossil fuel reserves and the dilemma that “when non-renewable energy will be diminished” is a fundamental and doubtful question that needs to be answered. This paper presents a new formula for calculating when fossil fuel reserves are likely to be depleted and develops an econometrics model to demonstrate the relationship between fossil fuel reserves and some main variables. The new formula is modified from the Klass model and thus assumes a continuous compound rate and computes fossil fuel reserve depletion times for oil, coal and gas of approximately 35, 107 and 37 years, respectively. This means that coal reserves are available up to 2112, and will be the only fossil fuel remaining after 2042.”

“A total of 573 deaths have been certified as “disaster-related” by 13 municipalities affected by the crisis at the crippled Fukushima No. 1 nuclear power plant, according to a Yomiuri Shimbun survey.”

“The range of estimates of excess mortality resulting from the Chernobyl accident spans a wide range depending upon precisely what is taken into account. The most recent epidemiological evidence, published under the auspices of the Russian Academy of Sciences, suggests that the scale of the problems could be very much greater than predicted by studies published to date. For example, the 2005 IAEA report predicted that 4000 additional deaths would result from the Chernobyl accident. The most recently published figures indicate that in Belarus, Russia and the Ukraine alone the accident resulted in an estimated 200,000 additional deaths between 1990 and 2004.”

“Damage caused by the Chernobyl disaster is estimated at some $235 billion. However, the overall amount of money that Belarus and the international community invested into the recovery amounts to just 8 percent of the total damage.”

“Japan’s government on Friday nearly doubled its projections for costs related to the Fukushima nuclear disaster to 21.5 trillion yen ($188 billion), increasing pressure on Tokyo Electric Power (Tepco) (9501.T) to step up reform and improve its performance.”

“In addition, the tsunami triggered the nuclear accident at the Fukushima Daiichi Nuclear Power Plant. To protect residents in areas surrounding the Fukushima Daiichi Plant, the government established evacuation zones that required approximately 154,000 people to evacuate from restricted areas.”

Reconstruction Agency; Official Website; Great East Japan Earthquake; 12.06.2016

Sources – Liberalization of markets

24

“There are still social, political and geographical barriers that the Asian region is faced with when it comes to deregulation in the power sector. The sector, many dominated in the region by the presence of state owned enterprises (SOE), is often protected by rigid state policies on service institutions and market structures, explains Venkatachalam. The monopoly of SOEs in energy production and distribution and outdated legislation make deregulation impossible in many countries. The presence of pervasive fuel subsidies and other cross subsidies to power generation stand in the way of competitive market development.”

“Currently, electricity is produced in a centralised fashion using massive power plants. Once generated, it is distributed over long distances to end-users. Whilst functional, this system is inefficient because: 1. Centralisation reduces competition and tends towards monopolistic practices 2. Distribution costs can add up to 30% to the price of energy 3. Fossil-fuel fired energy plants emit large amounts of pollution, including greenhouse gases, and nuclear facilities incur high, long-term waste processing costs. There is a need to replace the global, centralised model of energy production but until now, this hasn’t been possible because of the high clean energy production costs and the inaccessibility of the energy markets.”

Solar Bankers; Official Whitepaper; The world needs Solar Bankers; 2017

26

“The European Union’s forefathers had one simple idea in mind: strengthen relationships between European states to make war impossible. They believed – perhaps over-optimistically – that economic integration would inevitably lead to political integration, in other words the construction of a federal Europe. Gradually, every industry was integrated into the common market. In 1952, steel and coal were the first with the ECSC, followed by atomic energy with Euratom in 1957. At the end of the 1990s, it was natural gas and electricity’s turn to join the common market. The aim of liberalisation is simple: contributing to bringing peace to the continent by creating a common European market for electricity that would enable any consumer to buy megawatt-hours from any producer, wherever they are within the EU.
“

European University Institute; Official Website; Liberalisation of the European electricity markets: a glass half full; 06.04.2017

27

“Countries across the region such as Japan, South Korea, Taiwan, Malaysia, Thailand, Philippines and Singapore have opted for market deregulation in a bid to create sustainability. Malaysia has introduced deregulation to its gas and power sector and has paved the way for the introduction of Independent Power Producers (IPPs) to the supply function of the sector, helping the government to reduce the costs and administration involved in the exploration of new natural gas fields. Thailand, as a part of International Monetary Fund and World Bank recommendations, unbundled the Electricity Generating Authority (EGAT) assets and introduced laws for market deregulation. Since 2010, it offers new financial products that target huge market capitalisation. The Philippines’s Energy Regulatory Commission facilitated the privatisation of the National Power Corporation which worked very well in the urban centres, with fully liberated markets benefitting urban consumers. However, providing services to rural markets competitively remains a challenge.”

“Pollution and overcapacity is China’s reason for market deregulation. Pollution is a major driving force behind China’s reform as cheap coal and overcapacity encourage wasteful consumption patterns. This stands in the way of the government’s efforts to improve energy efficiency and cut pollution. China’s large scale investments in wind and solar energy are being under-utilised under the current system, which is too static to effectively incorporate fluctuating green energy generation rates, resulting in waste and the threat of power cuts. The country is a big energy consumer, representing 25% of the world’s energy consumption. Electricity distribution and transmission are critical to China’s growing economy.”

“Japan is aiming for a complete deregulation of its retail market by 2017 with reforms in electricity and gas markets. The Fukushima event was the main driver of the energy policy being revisited. Japan initiated its electricity market deregulation process last year April and it is steadily becoming one of the world’s largest deregulated electricity markets. If successful, the change could result in a vastly modernised energy sector resulting in lower rates and a more prosperous economy overall. The deregulation could see Japan advance innovation and even become a model for the Asian region.”

“In a report last month, the MIT team identified public and private research and development (R&D) and improvements in cell efficiency as the major factors contributing to a 99 percent reduction in module costs since 1980. … Wood Mackenzie forecasts that spot prices for modules could fall from $0.30 per watt-DC to $0.18 per watt-DC in the next five years, a 40 percent drop. And R&D is only part of the equation.”